Internet portal investments in India: a real options approach

Abstract

Internet growth across the world has been subjected to projections, hype and speculation over little more than a decade now. Even more intriguing has been the evolution of business models and strategies around on-line businesses due to the unpredictable nature of technology, business and life-style innovations, and externalities in demand. This project broadly aims at identifying investment strategies for pure-play Internet companies in India. Large global Internet companies have recently become serious towards India as a potential market, but there are concerns of market potential, consumer behaviour and consequently investment value growth. A few investments decisions relate to selection of segment to invest in from the point of view of investment growth potential and successful exits. There is empirical evidence about entrepreneurs investing in online businesses (as in other technology businesses) for successful sell-outs later. This is a very critical aspect of online businesses in India due to the fact that as an emerging market, there is a possibility of global players entering, potentially via acquisitions. We need to factor in the possibility of standalone investment value growth as well as potential exits. This is modeled in this project using real options model. Various model parameters are derived from assumptions about market maturity lag with US market, and actual asset values of existing Indian businesses. Indicative parameters of investment and exit schedules are derived. This gives us an investment valuation growth model, and this model is used to derive such growth/decline in various online segments. Various results of the model include optimal investment portfolio across segments, successful exit paths and valuations. The model is extended to model the scenario of multiple sell out seekers vying for buyers as a game. Alternate frameworks are developed to this model such as Indian Internet industry value net. The applicability of the project conclusions is to define elements of start-up strategy for Internet businesses in India (including investment and exit strategies), to define elements of India investment strategy for global Internet companies (including investment and acquisition strategies) and to develop an understanding of investments happening presently and in the past (ventures, acquisitions and JVs). Since the analysis is at the industry and generic firm level, application of these models could include further combining these findings with specific firm level characteristics.